WHAT’s WRONG WITH THE ECONOMY?

The strategy. The tactics. Everything. Since 2008, the central banks have created money. Why? Key actors of the economy lost too much money in 2008 to keep on functioning. Some of these actors: banks and “shadow banks”.

How did the central banks create money? Mostly by buying government debts from the large private banks. The banks thus made money. Who caused the 2008 crisis? The banks. Thus the very strategy used is Orwellian, and promotes a vicious circle. Upon closer inspection, the situation deep down inside is more of the same and even worse.

The result has been a faltering of economic growth, a creeping destitution of the 99.9% in the West, and the blossoming of colossal inequalities and corruption, worldwide:

Inequality Has Brought Down World GDP Growth. And Bringing That World GDP Growth Too Low Brings War

True, banks are more regulated than in 2008 (but much less than before the Clinton presidency brought devastation to the regulation of finance!) However, a large, maybe the largest, part of the banking system is “Shadow Banking”. That’s not regulated. By fostering fiscal heavens and anonymous financial entities, Great Britain and the USA are actually expanding the “Dark Pools” of money which feed “Shadow Banking”.

So what have the banks done with the money generously given to them by central banks? Did they invest it somewhere fabulous? No. There has been no new technological, industrial, economic, social breakthrough which needed, and provided with, the opportunity of massive investment.

(There were some efforts towards “sustainable energy”, but those subsidies and regulations are dwarfed by those in favor of fossil fuels, which total 5.5 trillion dollars, according to the IMF; the key is fossil fuels do not require much new investment, including in research, development and education as new energy sources would.)

No new nuclear program was instituted (say replacing all old reactors with better and safer ones), no thermonuclear powers plants (although a crash program would have probably produce those already), no massive space program (comparable to Apollo in the 1960s).

Even biomedical innovation, hence investment, has petered down (research has been smothered down by marketing, regulations, and cut-throat academia producing poor research).

But, mostly, there has been no new construction program in housing and physical infrastructure. Oh, there is a massive need: the dearth of housing is why real estate is getting out of reach of the middle class, in the top cities, worldwide. (Moreover one can now make positive energy buildings, which produce energy.)

And don’t forget public education has been let go to waste, in the leading countries (with few exceptions: Switzerland, Canada…) It is as if the leadership in the West was afraid that We The People would get knowledgeable and smart.

So where did the money the banks were given by the central banks go? To hedge funds and the like. To the industry of HOT MONEY. One day they buy this, the following week, they sell it, making money, both ways (thanks to financial derivatives). The money created by the banks (which are better regulated, as I said), at this point, once given to financial manipulators, escapes regulation (that’s the whole idea).

“Leaders” know about this. But they obviously intent to keep on getting money from shadow financiers. An example: Obama did not try to tax “carried interest” by hedge funds (although Donald Trump proposes to do so!)

The leading states (USA, UK, EU, China, Japan, etc.) believed that to provide money (“liquidity”) would relaunch the economy. Absent this, massive devaluations would help. Thus Japan devalued by 50%, undercutting South Korea and China severely.

Meanwhile the IMF has allowed these competitive devaluations, following the advice of economists such as Friedman, Krugman. However, this is tickling the tail of the worst devil. War. Economic war is the first step to all-out war, indeed. Competitive devaluations are a form of war.

And what’s the main mission of the IMF? Preventing economic war between the states. This is why the IMF has been created in 1945: “The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Thus the IMF is failing to do its main job. Notice that many American economists, from Friedman to Krugman, in their anti-European frenzy, have pleaded FOR the economic war of (European!) state against (European!) state, thanks to competitive devaluations.

Notice too that Abenomics, the devaluation of Japan, has not had much of a dent: Japan is still mired in stagnation, no doubt still afflicted by its main problem, the collapse of its population (a problem many developed countries have, especially in Europe; the USA and UK have escaped demographic collapse, mostly through massive immigration).

The world economic strategy reflects the mood of the times: the so-called “free market” is all the thinking and activity we need since Ronald Reagan. That’s in contradiction with policies followed by Colbert, Henri IV and Sully, or even emperors Diocletian and Darius. (Darius reigned over Persia 25 centuries ago.) They, like Julius Caesar, thought that the economy had to be governed by the state.

Will China try a massive devaluation, a la Abe in Japan?

Since 2008, the governments, mostly in the West, have been cowardly. The USA suffers from massive inequalities (and no, Mr. Obama, the situation is no as good as eight years ago), the European Union suffers from too much regulations (including at the level of services, where the European UNION has not been implemented), China is a dictatorship which became richer by exploiting workers relentlessly, etc.

Those competitive devaluations and lots of money sloshing around have been addictive: central banks engage in them, to give the states space, and the states, momentarily relieved, put off necessary reforms.

Inequalities suck up “liquidity” (so power and means) from average people, while putting huge amounts of money, and power, under the control of a few hands. And this money is invested in liquid investments, instead of serious things such as massive, affordable, state of the art housing and cities. Thus this money slosh around the world, like the waves of a tsunami, devastating all it touches (example: Greece, Spain, Portugal, Ireland, Iceland, etc.).

The reason the crisis goes on is the confusion between symptoms and disease. That the main actors in power have interest not to understand the nature of the crisis explains why understanding has not been fostered. Thus very few economists have seen it, let alone politicians. (From Obama down to Nancy Pelosi, Krugman, and countless “Republicans”, but also French Socialists, EC bureaucrats, USA universities professors, most actors of influence have interest to sound as intelligent as cows watching a train pass.)

How did the world come out of the slump of the 1920s to 1940s? Through reconstruction in the “30 glorious years” after 1945. Reconstruction from total war. Something to think of. One thing: many countries are on the verge of implosion. One culprit? The obvious world devaluation blatant in the collapse of the price of oil.

What is the way out of the world socio-economic crisis? The same way as it was done after 1945. Massive social, educative, health and construction programs in the West, building a useful economy, by taxing those who create the inequalities, and grab all the economy, and opportunities to themselves.
Patrice Ayme’

36 Responses to “WHAT’s WRONG WITH THE ECONOMY?”

Jean and I went to see The Big Short yesterday eveing. As well as being a good film and remarkably close to the truth of what happened during those years, it served as a powerful reminder of how twisted and corrupt the banking system was; and may still be!

It also underlined the apalling way that all those responsible for selling sub-prime bonds did not end up having their day in court but were bailed out by Western Governments.

Dear Paul: I did not see the “Big Short!” I had the occasion to see it, but I am so much into this disgusting stuff, I could not muster the will… 😉 I should see it, though… The banks are LESS corrupt than in 2008. However, the financial system is MORE corrupt than in 2008, overall.

Bankers get a pass on anything, even financing Al Qaeda and drug lords (not kidding: a little noticed piece of official history): they are just asked to pay little fines, if caught…

The stock market was originally a great idea: create a mechanism whereby people could invest in companies for the mutual benefit of both companies and investor. However, over the years – in line with my quote above (is this the only original idea of my life?) – it has become no more than a giant casino, but one with subtle rules and complexities that only the rich and very clever can manipulate to their maximum personal advantage, thus becoming immensely rich and ever richer in comparison to the majority of people, whose involvement in the stock market is limited to having assets in pension funds and so on which are managed by others.

The greatest refinement of the plutocrats has been instant trading using computers to buy and sell stock in milliseconds. This is all pure speculation/gambling/exploitation, and a long way from the original worthy intentions. Those in the know and in possession of the right tools can make millions, while ordinary investors are likely to lose out.

OK: Two conclusions:

A) The system is evil and is furthering and increasing an already obscene wealth gap.

B) No president has managed (or apparently even tried) to reform this system, which has got far more abusive under Obama.

C) I therefore despise all recent presidents and in particular Obama and his immediate predecessors who removed a certain number of limited controls on banks. These have all been evil, incompetent and short-sighted men (it’s always men so far).

I particular despise Obama because he is so glib but is full of empty guff. If the US really wants to control health costs and make health available to all it should destroy the big pharma/doctor/insurance company monopolies that rip off the people. There is no reason why the US should spend 16% of its GDP on health and yet have a far worse service in universal terms than Germany or France, which spend a fair bit less.

Burt health is just one example. Unless someone, sometime sorts out the wealth gap it is going (as it always has throughout history) to end in revolution and in turn dictatorship of one kind or another.

As for solutions;:

Stockmarket: make it illegal to hold stock for less than a month: that would end most of the gambling element at a stroke.

Banks: abolish this insane idea that a bank is “too big to fail”: If you know you will be bailed out then you are not going to be prudent, are you? Any bank failing should be nationalised, the directors jailed and investors and depositors compensated.

Wealth-gap: make it illegal for any directors to earn more than say 25 times the average salary in his or her company, including stock options, bonuses, golden handshakes and all the rest, and anyone abusing this rule to be incarcerated like Bermie Madoff.

None of this will happen because it is not in the personal interests of anyone on Capitol Hill or the White House, which is where a revolution comes in. Trump may actually be preferable to a REAL revolution, which would not be pleasant at ALL, since revolutions usually hurt the masses MOST.

France’s 1789 Revolution lives on in the United Nation Charter, and roughly all over (the sister American Revolution was deeply entangled: the French and the Americans wrote their Constitutions in 1789 CE, within WEEKS of each other; with the Americans, it was far from clear what “WE THE PEOPLE” meant: the British crown offered freedom to all and any “black”, not so the USA).

In the Twentieth Century, “dictatorship of the proletariat” “revolutions” ALL failed (except maybe in China and Vietnam), and the Peoples suffered immensely.

I do agree with the contempt for all recent USA presidents (although I don’t despise Kennedy, or Eisenhower, the latter with reservations). FDR did VERY good inside the USA, very bad in Europe, Arabia… Wilson was a disastrous racist, launcher of WWI (thus WWII). Teddy Roosevelt was excellent. Lincoln… Well, 3% population dead.

USA president before that were all into conquering North America. If one loves killing Indians and stealing their lands, then they were great…

Obama indeed only care about pleasing the powers that be, he hid his game.

Sanders, though is sincere, and a real hope. After that Trump (yes!) is best (he is for taxing hedge fund managers, single payer, or socialized medicine). Clinton is a hopeless plutophile, Cruz a Goldman Sachs liar (he got a giant loan from… Goldman Sachs to be elected Senator, and that secretly (illegal))

Americans have a real choice: Sanders will bring a mini-revolution, absolutely necessary

I agree with pretty much all of what Chris says except how all this will be resolved.
Patrice has written extensively on the decline of previous societies, especially Rome with the growth of plutocracy.

The fact of the amount of wealth the plutocracy has (70 families with as much as the bottom 3.5 billion people), and the vast armies of talented professionals doing their bidding, can’t conceal the banality of much of their actual “beliefs”. Their sense of entitlement is their substitute for actual thinking. The most risible example to me is the constant refrain of how they “worked hard” for everything they have. No they didn’t. They simply gamed the capitalist system, stealing and corrupting as necessary. Capitalism awards the big returns to capital, not labor. That’s why it’s called capitalism.

But the current interest in Trump and Sanders seems to me to signal that many people are quite aware they’re getting screwed by the current system and want something done about it. Trump is using the classic fascist technique of blaming the fearful Other – in this case latino immigrants and Muslims instead of Jews, but the dynamic is the same.

However, I suspect that Sanders, not Trump, is the one who is really saying things you’re not supposed to say and scaring them the most.

And as for Clinton, if you ever saw the movie “Election” with Reese Witherspoon, her character of Tracy Flick is like an x-ray of Hillary’s soul – the hyper-ambitious wannabe ready to work within the “system”.

Excellent comment, John. Clinton had her chance, confronting Sanders, to turn full left. Indeed, Trump is also claiming the left field (single payer, socialized medicine, taxing the financial plutocracy, his “friends” whom “he knows very well”). So Clinton had no excuses: had she been NOT from the plutocracy, she could have used the occasion to do what Sanders and Trump (or even the lying Cruz!!!!!!!!!!!!!!) do: veer left, at least with her lips. She did not. So we have the answer about what she would do if president, namely what Pelosi/Obama/Clinton did before her: make the rich richer.

Before I was ready to give her the benefit of the doubt. No more now. Your comment is worth an essay, actually, especially about the plutocrats having armies of professionals (all the way to Krugman and Obama) doing their work… For them.

BTW, Gates got started by his mom, who was an IBM director (gave him his first job, namely the occasion of getting money from IBM and stealing its OP). Gates’ dad founded the top law firm in the state of Washington, no less… So much for self-made man…
PA

Researchers have complained that Gates has influence heavily the direction of RESERACH on disease. Like Obama put the Gates in charge of education (something the constitution does not anticipate). I am sure that will allow Obama to travel free come next year (Gates and Buffet own the largest private jet renting company). Obama loves to jet around in style.

The appeal and themes of Sanders and Trump are a ray of hope… (Even the lying Cruz has opted for that so-called “populist” approach.) It’s not just that they could do it (Sanders would, and Trump is plenty crazy enough to), it’s that they make the themes (tax financial plutocrats, make health care a right) respectable.

You read me correctly, I thought I made this plenty clear. But maybe I add a sentence or two to hammer it down a bit more, like the sentence you exactly used, which, not meaning any disrespect< I have already used in the past…. 😉

Big things are happening in Economy beneath the surface.
A. The technological revolution. Alternative energy sources, new nano technology materials, e-economy mainly services but also production management, etc. Maybe the only economic field that did

Sorry for the previous slip of the text. Don’t use mobile to write a technically complicated comment.
Big things are happening in Economy beneath the surface.
A. The technological revolution. Alternative energy sources, new nano-technology materials, e-economy mainly services but also production management, etc. Te only economic field that did not participate in this e-economic revolution is real estate and agriculture. Buildings and agriculture still need the same land, and it is becoming more and more scarce. The price collapse of oil and other raw materials is a result of this e-economy.
B. Money printed by governments to purchase government securities, that started in US, is now happening in Euro-zone and Japan.
C. The Chinese Yuan will become eventually a world currency. Then to prevent capital runaway to US and Europe, they have to improve the transparency of their political and legal system. No modern economy can thrive without faith in fairness of the political and legal system. In the near future i would rather expect a revaluation of the Chinese currency than a devaluation.
D. Chine is fast to adopt new economic trends. Since the consumers markets of US and Europe stopped to grow, there is no place for its additional export oriented products. After 2008 it focused its over production to major infrastructure projects, the white elephant projects showed this policy also has its limits. So their new 10 years plan is inward oriented emphasizing environment, living standard of Chinese citizens and technology-science development.
E. The cash money flood filling the banks vaults or rather the central banks vaults where they are deposited, is a big mystery to what direction it will blow up. The banks are in these days in process of restoring their equities according to Basel III accord requirements. http://www.basel-iii-accord.com/
Since equity can be created out of profit or new capital influx, and at today’s interest rates the profitability of the banks is reduced, and so are the chances for new capital raising the only option for the banks left is credit squeeze. Viz.; http://qz.com/163160/the-euro-zones-credit-crunch-will-get-worse-before-it-gets-better/http://value4risk.com/the-mispricing-of-financial-institutions-tail-risk/
This process will end sometime in 2020. What then? By then the non financial institutions will learn to find capital from other sources. http://value4risk.com/wp-content/uploads/Screen-Shot-2015-08-20-at-9.17.05-AM.png
So when in 2020 the bank wake-up day will come, what will the banks do? They will have the capacity and liquidity to credit policy ease, but there will be less need for their money in economy with demographic collapse in Europe, China and Japan, when technological innovations channel the economic activity to products free of charge or cheaper and cheaper. Then we have the corporations with mountains of equity and liquidity due to reduced investment rates. To this have to be added the cheap money policy of close to zero interest rate, that will be hard to change due the liquidity in the financial but also non financial institutions. The banks will be able to keep their funds in the central banks vaults, or invest into the real estates, that still represents certain level of perspective for profitability.
Conclusion. The E-economy is an economy where bigger and bigger part of economy are channeled out of the conventional economic institutions. It is global, partly free of charge and hardly registered in official statistics. So the GDP figures will hardly grow and so the taxes.
Dear Patrice, since all these institutions, who are damaged by these trends are Pluto-oriented, i believe very soon the time to celebrate will come, and without need for revolution. Even if may happen that the new anti-politically-correct leading presidency candidates can speed up these trends, .

[Sorry about delay in letting comment through: WordPress stops the comments with lots of links… Just made IMPORTANT REVISION TO THE ESSAY, DOUBLING ITS LENGTH, to make it clearer.]

As I made clear, I am for the “POPULIST USA presidency candidates. That means SANDERS, and far far behind…Trump. Cruz is faking it, posing as a populist, but just the opposite. Everything indicates he would be real real real bad. Clinton does not need a description: she is 100% pluto, and does not even try to hide it.

Right now more than 5% of USA’s electric production is renewable: 4% from wind, 1% solar. (I did not count hydro.)

A revolution is impossible to avoid, if things are going to improve. It does not have to be bloody. But I do agree that technology is pressing down, for the better. Rome collapsed, proximally, because it could not solve its tech problems (maybe conquering the Celts did not help, as they had more advanced metallurgy… and kept being more advanced for, well, to this day; but, having conquered them may have diminished the competition, hence the advancement of said tech, by replacing tech by slavery…. besides killing, or enslaving millions of Celts/Gauls)
PA

Elon Musk’s car is a joke, but the returned Falcon rocket is not. Bill Gates is a marketing empty wrap. He and his windows product is the greatest nuisance of the modern world imposed on the consumers by its monopolistic position. Hopefully with googles android and linux some competition will emerge. The industrial revolution was a unpredictable incident. The ancient Greek philosophy and science was as sophisticated as the 18 century British, except of Newton and Galileo. Yet the Greeks had Archimedes and his followers, who were almost as far as Newton. (Archimedes discovered derivation).
But the industrial revolution started due to real need for more efficient mine pump. Still it took 100 years until the steam engine was successfully introduced as locomotive. All the previous attempts to introduce technologies to the reall life, including that of Hero in first century did not do the job. Why? I never found a real answer to this question. It was probably the special circumstances that brought together the need and the individuals like Thomas Newcomen and even more James Watt, who happened to be the right man in the right time and at the right place. Since then all the technological development got its momentum at accelerating rate. At present we are more than ever at threshold of introducing new technologies in many fields of human activity. But there are also risks. These technologies may be easily misused. It seems there are enough people in this world, whose only aim in life (or death by suicide) is to destruct the scientific-cultural achievements of the humanity.

The car is not a joke. I know people who bought it, and even gave lots of money to be on the waiting list for the Tesla Model X (the SUV to complement the Model S). Some people in the Silicon Valley hate gasoline that much. I have nothing against it: it lowers pollution. I chide some of my friends that they will have to keep on renting cars to go skiing (as they do now).

The returning rocket does not at this point look necessarily like a winner. Arianne Espace claims that they look at it, could not work. The economics, not the tech.

My objection is that research does not get enough money. Actually, that’s going to be the next essay, let me finish it, and post it.

And I concur. “WORD” for example is not just costly and useless, but it freezes one’s computer. I finally realized this, by using free systems which operated seamlessly. I asked a Silicon Valley inventor, he told me “WORD” was essentially for corporate, basically to spy on what the employees do, or have done… Anyway WORD + cloud is a disaster…

The problem of debt is real, but irrelevant to the problem that there is more money sloshing around than there are potential investments. The relationship between the two problems is that the lack of potential investments arises from the same plutocratic mood which refuses to provide We The People with debt relief

We are entering a period of asset deflation. It’s not all bad but it will feel so because there is a global wage disparity – globally, nationally and even familial. Don’t expect fairness. Don’t expect people to care. They have their own issues.
Expect a breakdown in civil authority…if your lucky, a political revolution.

The global deflation is caused by too much money sloshing around without possibility of real investment in the real economy, while new, more efficient tech makes some of the old tech over-producing, too inefficient, polluting (example: coal, especially the sulfur laden coal from Australia).

Sanders over Clinton is most certainly preferable. Trump over Clinton, however, does not seem as much so. Yet, if she is destined to follow the lead of Bill, then Trump is the alternative choice? Only if he is truly serious about taxing hedge funds (and more) and creating single payer healthcare could it even be entertained.
Trump sounds dangerously fascist in his rhetoric, so much so that even plutocratic Clinton may be the grudging choice. Trump has little to show in the way of any compassion for the common folk.
Trump seems as hawkish as Clinton, and spews racist slurs for good measure. Is his incidental talk of taxing plutocrats and single payer enough to hold one’s nose and pull lever for him over Clinton? You seem to suggest as much. Is there something more that I have missed here?

Derek Ross
Not really, Patrice. There is only too much money sloshing around for the relatively few of us who don’t have any debt. We can’t find any potential investments because the majority, who have too much debt, aren’t getting any more. Why not? Well either they don’t think they can come up with enough money to pay us back; or we don’t think they can come up with enough money to pay us back.

See my answer to How serious of a problem is the US debt of over 18 trillion dollars and what do economists say about this? for more details.

Derek: I do agree with what you say. The debt is a show stopper. Indeed, that’s part of what I say. Most of the money of the world is in “Dark Pools”, the owners of which are unknown… but immensely rich (and debt free). The rest of us have debts.

Thanks for sending me the link. Interesting comment on Diocletian. He was a surprising person, and he did straighten out a crumbling economy, although that did not last either. Must think more on this.

Hi Ian! Glad to see you here! Diocletian’s story was complex. He retired because of his cauliflowers, so beautiful they were, he said… But actually he was sick. He went out of retirement when there was a huge crisis with his successors who were incensed by Galerius’ decisions. Galerius is the one who went all out against the Christians, killing about 3,000. Then he got a really bad cancer, and declared a general amnesty…

Diocletian’s command economy worked. I think the real problem was Constantine later. He was nuts, murderously jealous… And that led him to execute his very capable and popular son (who thought Christianism was going too far).

Good post, Patrice. As an aside, “the Big Short” is worth seeing because it exposes the fraud at the most basic level. Unfortunately, besides not sending the money anywhere useful, I do not believe they have done anything about the fraud either so I doubt we have seen the last of this crisis.